Establishing a Franchising Corporate Structure in the U.S

Establishing a Franchising Corporate Structure in the U.S

International franchise businesses can be established in any country, including the U.S. Although you can start a franchise in the U.S, you need to be aware of the legal infrastructure to avoid future disappointments.

A franchising attorney can help investors set up an international franchise business in the U.S.A. He/ she is tasked with providing legal counsel on the basics about franchising laws of the jurisdiction in question.

What is Franchise Law?

International franchise law is used to govern and regulate international franchises. This law addresses various aspects of franchises, such as the offer, acceptance, legal relationships, and the terms of sale. The following points should be considered before investing in an international franchise:

  • Are there foreign interests in the franchise?
  • How to secure intellectual property in international franchising.
  • Legal requirements in the preferred country of expansion.
  • Is the brand competitive enough?

The legal documents required, by law, for international franchising include:

 

  1.     The franchise disclosure document.
  2.     Franchise agreement.

International Franchise Agreement

Franchise agreements are binding and legal documents that regulate a franchise. The contents of a franchise agreement include:

  • Expectations of the two parties.
  • Obligations of the transacting parties.
  • Permissions for the franchisee.
  • Operating restrictions.
  • The franchise fee that’s payable by the new investor.
  • Trademark details.

How to Establish a Franchising Corporate Structure in the U.S

For legal reasons, establishing a U.S based company (subsidiary) is recommended. Although it will be incorporated in the U.S, you will still retain ownership and control of the franchising subsidiary. Additionally, you are considered the legal entity for giving franchises. The advantages of a U.S based franchising subsidiary include:

  1.     Limits the liability of the parent company.
  2.     Limits legal exposure regarding the preparation of financial accounts or audited statements.

The corporate formation aspects to be considered when setting up a corporate structure include:

  • State of Formation.
  • Entity type (is it an LLC or a corporation).
  • Ownership: Who are the shareholders or the owners of the entity?
  • Tax Identification Number: A TIN should be obtained for the new franchise.
  • Bank Account – Opening a bank account for the entity is necessary, including depositing money for capitalization.

Common Franchising Disputes in the U.S.A

In some scenarios, the franchise agreement provides a way to resolve disputes in the event they occur. It may be through mediation or arbitration. If dispute resolution mechanisms haven’t been highlighted, the franchisee and franchisor may initiate the mediation process on their own. Unfortunately, mediation doesn’t always resolve some complex disputes. If mediation is unsuccessful, the disputing business partners should contact a franchising lawyer. Common disputes in a franchise include:

 

  • Territorial disputes.
  • Franchise agreement disputes.
  • Disputes on franchise termination.
  • Financial disclosure disputes.
  • Compliance disputes.

Types of Franchising Business Models in the U.S.A

The common business models in franchising include business format, product, manufacturer, and master franchises.

Business Format

80% of American franchise businesses run on the business format model, where the investor establishes a business using the name of a successful brand, such as McDonald’s. The franchisor should provide regarding planning, operating, documenting, branding, and marketing. In exchange for the support, the franchisee pays an initial franchising fee and recurring royalties to the franchisor.

Product Franchises

Product franchising is the oldest type of franchise business model. Product franchises allow dealers to distribute goods for a manufacturer. The investor pays a fee to sell and market trademarked goods, come directly from manufacturers. In some agreements, the franchisee doesn’t pay a fee but is required to meet

Manufacturer Franchises

The franchisee gets exclusive rights for the production and distribution of a product in a geographical area. Manufacturer franchises are common in the food and beverage industry, although they’re also ideal for the manufacturing industry.

Master Franchising

In this model, an investor, the master franchisee, uses the products and trademark of a well-established business, the franchisor. The master franchisee is tasked with recruiting, training, and supporting the new members recruited. The rewards of a master franchisee include 50% of the franchise fee and royalties paid by recruits.

Identifying a Competent Franchising lawyer

Due diligence should be done when hiring a franchising lawyer. A competent franchise lawyer should possess the following bare minimums:

 

  • Widely experienced.
  • Good reputation.
  • Be a qualified lawyer.
  • Should be committed and dedicated to franchising.

 

Franchise Agreements Best Practices

Seek Legal Counsel

Most people do not involve franchising experts when establishing franchises. Without any legal counsel, potential investors can easily make legal blunders.

Clarity

Be clear on the franchisors’ obligations from the word go. May means that they’re not obligated to do something but shall indicate obligation on their part and they’re expected to fulfill the same.

Being real

You should enter the franchise knowing that the success of the franchisor is not a guarantee that you’ll equally succeed. Working hard is the key to excellence.

Establishing an international franchise business is typically technical, and even complicated, if not handled properly. Adhering to the franchising laws of the U.S.A is key when considering a franchise business in its jurisdiction.